Debt consolidation is one of the loan payment methods where you can take out loans to pay off other loans. Multiple debts are combined together, such as student loans, credit card debt and other kinds of debts as well. It is an effective way to pay off the debt, but it does have drawbacks as well.
It is true that someone who has many debts to pay is always distressed and even buried in depression if he is going through a financial crisis. Car loans, home loans, education loans, credit card loans and so on are basic necessities of a middle-class man in this world running at the pace of light. But when all these climbs on your head like termite after consuming your pockets, it becomes very hard to cope with the hassle circumstances.
Debt consolidation, in that situation, comes up as a sigh of relief. But when anything is related to our money and financial management, it is very important to count on each advantage and disadvantage of it.
Debt consolidation has its own pros and cons which you should explore before going for it.
Pros of Debt Consolidation
- Debt consolidation means to club all your debts and loans into one, which reduces interest rates that are a great thing to trim extra payoffs. All you have to fret about is a one-time payment.
- One very important and aiding advantage of debt consolidation is that you stop getting calls and notices from banks and collection agents. When there is no one to trouble you by calling every day asking for money, your psychological health becomes positive and this makes you constructive in your thoughts and production at your work.
- Debt Consolidation Company purchases your worries from the collection agents and pays off credit reporting companies.
- If you opt for consolidate debt, it saves you from being declared bankrupt. How good this deal is, only a big debt holder knows. By devising a financial budget and with the help of consolidate debt, you can start to improve your reports and credit stores. The best thing is you can start your financial management afresh where you can avoid all the wrong decisions you’ve made in past. There will be no one to give you frowns while you do this.
Cons of Debt Consolidation
- Once the funds are available, People often fail to manage their finance again causing themselves to commit the same mistakes that they’ve done in past. It brings in more problems and accumulates more debts and financial obligations.
- Consolidation loans give you long timelines like 10 to 30 years to settle your one-time debt which however saves you from debts to pay on short tenures that too at high-interest rates.
- For all this time, your assets or your property remains mortgaged tied to a home equity loan usually. This means your debt consolidation loan is given against the value of your assets which are kept mortgaged. If you fail to pay the consolidated debt, you end up losing your home and assets.
- If you analyze deeply, you’ll get to know that in the end you will land paying more over several years than it had to be on short tenures. To burden you in the end, you’ll incur penalties like late fees or so.
Better Financial Management
Debt consolidation is one of the effective debt payment ways, but it comes with some risks. For people with no other option to pay off debt should opt for debt consolidation as the last option. While it can help you pay off the debt, it increases your financial burden.
To avoid falling into the same pattern again, you need to build a better and more effective financial management system. Here are some effective ways:
- Avoid adding to the debt and don’t buy anything that will add to your existing debt. Reducing your expense is another way of reducing the burden of debt.
- Create a budget and stick to it. It is one of the most effective ways to save money and manage your finances more effectively. A budget can help you live within your means.
- Save more money by earning extra money and reduce your expenses. Start a fund so that you can keep the extra money on it. This way you will have more money to pay off the debt.
- Be consistent with monthly payments. You are already in a debt, so you don’t want to extend the burden by being late on your monthly payments.
So, before going to opt for a consolidate debt, you must be self-aware and calculative in your approach. Once you take a consolidate debt, you should manage your financial structure well in order to refrain these hassles circumstances again.
What do you think about debt consolidation?